Hudson City Bancorp: Short-Term Risk, Long-Term Opportunity?

Chuck Carnevale submits:

Hudson City Bancorp (HCBK) is widely recognized as one of the most conservatively and best managed financial institutions in the country. Thanks to their conservative lending practices and prudent fiscal management, Hudson City Bancorp prospered through the great recession while other financial institutions faltered and even collapsed. This prudently run financial institution did not partake in any of the egregious behavior or business practices most financial institutions gluttonously gorged themselves on.

Therefore, with no exposure to subprime and/or other toxic loans or investments, Hudson City Bancorp did not need to participate in the government's Troubled Asset Relief Program. Ironically, we feel that Hudson City Bancorp is today being penalized for this good behavior by the government’s forced need to support a fractured mortgage market created by the reckless behavior of other financial institutions. US government-sponsored enterprises (GSE’s) have temporarily become formidable competition in the mortgage market. According to Hudson City Bancorp’s most recently filed quarterly report, Ronald E. Hermance, Jr., chairman and chief executive officer, had this to say:

"Conditions in the mortgage market continued to produce substantial headwinds. During 2010, market interest rates were at historical lows and pushed mortgage rates below 5%. This caused prepayments and refinancing activity to increase, resulting in lower yields on our mortgage related assets. As expected, the continued low interest rate environment continued to negatively impact our net interest margin in the fourth quarter. The recent increase in longer-term market interest rates have pushed mortgage rates higher, but the continued elevated levels of employment, the weak housing market and the unprecedented level of US government-sponsored enterprises (the "GSEs") involvement in the mortgage market have impacted our ability to grow our loan portfolio as the GSEs were involved in over 90% of U.S. mortgage production."

All of the above is having what we suspect to be a short term, and hopefully short-lived negative impact on Hudson City Bancorp’s earnings growth and performance. On the other hand, we further believe that Hudson City Bancorp’s management and board are deliberately limiting and controlling growth until the situation improves. We also believe that they are hunkering down in order to protect and maintain their pristine balance sheet and capital ratios in preparation of exploiting an improving market for their products and services. Additional comments by Mr. Hermance have led us to these conclusions:

"As we look forward to market conditions that are more conducive to our business model, we're exploring the best ways to reduce interest rate risk, strengthen our balance sheet to restore traditional earnings trends and to prepare our balance sheet for future growth. We expect that this process would result in a further restructuring of our funding mix-a process we started in 2009 with the modification of putable borrowings to extend or eliminate put dates and to fund asset growth with consumer deposits. Any such restructuring will focus on the prospects for long-term overall earnings stability and growth as market and economic conditions become normalized. We believe it is important to adjust to current market conditions and prepare to capture a greater share of the residential mortgage market when conditions improve. While it is difficult to predict when that may occur, we believe that this is the time to look ahead to the 'new normal.'"

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